Prudent lending practice where residential properties are used as collateral demands that the market value of residential properties be validated by some means. Lending bodies have traditionally depended on appraisals to guide them in their lending decisions, and appraisals will always be a valuable tool.
In most loan applications where residential properties are used as collateral, there is sufficient equity in the property to justify the loan. The degree of due diligence necessary regarding the property depends on the value of the property, and the amount of loan requested. Traditional full appraisals are not necessary in every instance; however, prudent lending practice demands that some objective, independent, controllable risk assessment of each case be done.
Automated Valuations Models (AVM's) are available, which calculate current market values for residential properties based on large databases of property and sales data. AVMs offer several distinct advantages including: the ability to produce valuation instantly, and produce other information about the property and background market that would be difficult or impossible to produce manually. They have the potential to be a very effective tool for lending institutions. However, there has not been a general process to embed them in the lending process.
The very nature of AVM's is such that they are in some ways not as precise nor as specific as traditional methods. Since the use of an AVM directly affects lending decisions, it is essential that any such process be controllable through the risk management function of the lending institution.
Therefore, there exists a need for a systematic way to implement the safe use of modern AVM's into the lending decision, in a controlled and customized manner.